Federal Treasurer Wayne Swan says he is set to deliver a tough budget. Julia Gillard remains committed to bringing government back to surplus by 2013.
Budget day is an appropriate moment to ask how the Australian economy compares to others in the English-speaking world – a large area which I will reduce to three: the UK, Ireland and the United States.
In almost every respect, Australia is doing well, in both absolute and relative terms. Barack Obama would rather have Julia Gillard’s economic woes than his own. He would also embrace her freedom of action, an observation to which I shall return. First, why would he prefer Gillard’s hand?
Wealth consumed
Consider these figures. The deficit – that is, the shortfall between what the US government spends and what it raises in revenue – currently stands at 9.4% of GDP, according to the 2011 figures from the OECD.
By 2050, on current spending plans, 21.1% of America’s “wealth” will be consumed by the deficit. In previous years, estimates of long term debt has suggested the money that has to be borrowed to make up the deficit will rise from 72.2% of GDP today to an estimated 279% (!) in 2050.
The logic of compound interest – as anyone with a credit card will or should know – means that the US will be paying nearly 14% of its GDP – its wealth – on servicing the debt (it is currently paying 2.4%).
In contrast, the Australian deficit stands at just 2.6% of GDP. The budget is predicted to be in surplus this year or next – Australia will spend less than it raises in revenue.
Political fantasy
An American surplus is increasingly the stuff of political fantasy. Ditto, Ireland and the UK. Australia is a positive economic paradise in comparison. The Celtic Tiger is now a protectorate of the European Central Bank.
I lived in Ireland when it was roaring and the Euro in vogue in the early 2000s. The contrast could not now be more different. It has a public debt of nearly 50% and a deficit (as a proportion of GDP) twelve times greater than that of Australia.
Ireland is again exporting its highly educated workforce – to Australia’s benefit. Wedded to a single European currency, Dublin is no longer able to set its own economic policy.
The United Kingdom, having escaped the Euro straitjacket, is still saddled with a public debt that dwarfs that which Wayne Swan has to handle (69.9 vs. 1.8). To all intents and purposes, from 1997 to 2010, the British Labour government created a client state.
In England’s north, Labour’s heartland, nearly a quarter of the workforce is employed in the public sector. This equates to a staggering 60% of economic output, according to the British consultancy firm, the Centre for Economics and Business Research.
This is a Soviet level of state dependency – a model that hardly secured lasting prosperity.
Robust health
In contrast, only 9% of Victorians work in the public sector (and 15% nationally). Okay, we know the mining boom is a key factor in Australia’s economic health but even without that accidental good fortune, the Australian economy is robust by comparison.
America’s problems are particularly acute because of its social spending. As Iwan Morgan argues in his sobering book, The Age of Deficits (2009), the US is facing a ‘fiscal tsunami’ of rising entitlement costs.
Defence spending consumes only 4.7% of GDP (a figure which will fall further after withdrawal from Afghanistan and Iraq). It is not the US military that is bankrupting US coffers but Social Security, Medicare and Medicaid.
These three largest entitlements consume 15.7% of GDP now but double that by 2050, according to the White House.
On the basis of current spending commitments they will consume nearly all federal revenue by 2031. Thereafter spending would have to be funded by an unpalatable combination of borrowing (from sceptical Chinese lenders), cutting (discretionary programs, like welfare) and taxing. All are unappealing, the latter especially so. The American republic, we should recall, began as a tax revolt.
Gillard’s choice
The Gillard government, in contrast, is seeking to raise taxes (on carbon) not to save the Australia economy, but on the basis of choice.
Sure, she will encounter resistance. But her room for manoeuvre – even on a tax predicated on her reading of climate change science – is vast compared to Obama’s – predicated on the fiscal survival of the United States itself. The carbon tax is a reflection of just how healthy the Australian economy is.
Here the differences in the Australia and American economies become less about numbers and more about politics and culture. The US Constitution is constructed so that power is hard to secure and exercise.
Its framers feared poverty and inequality less than they did the concentration of federal power. Government was the greatest threat to liberty, they argued. Checking it was imperative. The size of the US government has, of course, grown since 1787.
But that extension of national power has not weakened an organic distrust of governmental interference which is sown into the fabric of American politics. It may be rational to attempt to balance the budget – Obama claims rationalism as his ideology – but this claim cannot trump the greater fear of the powers the government, not just his administration, will demand to effect it.
The Australian government does not have to endure this impediment. Here, there is a legitimacy to governmental action, indeed, an expectation of it.
The carbon tax, in an Australian context, is a technocratic debate over what works. The environment, healthcare, education – these are issues that every Australian political party contends can be managed better by their being in power. Voters pick the parties they think will deliver on such issues.
In the United States, such rational technocracy, even if in pursuit of fiscal survival, conflicts with a more deeply rooted mistrust of political power.
This is not to deny that Americans vote to be given things – not least their Social Security and Medicare cheques. But budgetary politics in the United States, as not in Australia, are about more than delivery.
They are framed in terms of first principles, of the appropriate relationship between citizen and state, of how far the people should be ruled by an elite.
In Australia, the carbon tax will produce much hot air. In the US, a tea tax created the nation itself.